Preying on Intel

[The Bleeding Edge]( Editor’s Note: Launching the Perceptron has been one of Jeff’s top priorities since he returned to the helm here at Brownstone Research. Countless hours poured into this AI project… more than $1 million spent in research and development… and now, we’re only hours away from Jeff’s big event. Tonight at 8 p.m. ET, Jeff’s going live for his Perceptron relaunch event. There’s still time to sign up. It’s free to attend and Jeff will even share the name of a crypto the Perceptron is flagging as a buy, right now. Just [go here]( to automatically add your name to the list. We hope to see you there. --------------------------------------------------------------- Preying on Intel By Jeff Brown, Editor, The Bleeding Edge --------------------------------------------------------------- As the story goes, a wolf in search of its prey stumbles upon a sheep’s hide. The wolf wears the hide, which enables it to wander freely – in stealth – amongst a flock of sheep. The disguise enables the wolf to prey upon its target without suspicion, as the flock thinks the disguised wolf is one of them all along. “The Wolf in Sheep’s Clothing” was one of Aesop’s most well-known fables. Aesop was an ancient Greek storyteller whose fables were first told back around 600 B.C. But they are just as relevant today. I was reminded of Aesop’s fables earlier this week, as I was keeping up on the latest developments with Intel. How Private Equity Feasts For anyone wanting to get up to speed on Intel’s “pickle,” I recommend reading [The Bleeding Edge – Farewell, Intel]( first. Intel holds a very odd position in the semiconductor industry right now. It is, I believe, the only major publicly traded semiconductor company to be down this year – a stunning 54% drop since the beginning of the year while everyone else is up. A few days ago, news broke from Bloomberg that Apollo Global Management (APO) had made an offer to invest as much as $5 billion in the beleaguered Intel. How generous. A lifeline. Apollo is a hardcore private equity firm known for leveraged buyouts, divestitures, and investing in distressed assets – the prey. Its principals always come well-dressed in suits bearing gifts – the money – allowing them to wander unsuspecting amongst the flock. More telling is that Apollo had already succeeded in infiltrating Intel this June, when it made a deal to acquire 49% of Intel’s new semiconductor fabrication plant (fab) in Ireland for $11 billion, giving Intel much-needed cash. What saving grace… Leveraged buyouts (LBOs) in the semiconductor industry by private equity are not unusual. Two of the most famous of all were Freescale and NXP Semiconductors. Blackstone, Carlyle Permira, and TPG acquired Freescale Semiconductor – the semiconductor division of Motorola – back in 2006 for $17.6 billion. KKR and Silver Lake Partners succeeded in their LBO of NXP Semiconductors – which was Philips Semiconductors – also in 2006 for 8.3 billion euros. NXP’s LBO turned out to be a huge success. And Freescale’s LBO was a terrible mess, which ironically resulted in NXP acquiring Freescale for $11.8 billion in 2015. On the surface, it might look like Freescale’s original private equity buyers lost money. But that’s not the case. Because the private equity firms used so much debt for the majority of the acquisition of Freescale, they actually managed to make a small profit and leave the debt with Freescale. That’s the game. But Apollo’s approach is different. It’s not buying out the entire company. It’s not there to save the entire company… It’s sinking its claws into its prey, gaining a foothold for what it knows will come, something it will actually help affect: a breakup and divestiture of assets. The involvement of a major private equity firm like Apollo is no surprise at all. Intel needs cash and major change. And for those who read [The Bleeding Edge – Farewell, Intel]( you’ll know there are plenty of assets to be “eaten” and divested. That means tens of billions of dollars of opportunity. But there’s more to the story here… It’s the timing of Apollo’s dealmaking that is far more interesting to me. Recommended Link [Meet ChatGPT’s Killer: Bill Gates]( [image]( I recently traveled to Wisconsin to investigate Bill Gates’ newest AI project ([Click here to see it with your own eyes]( I believe this new type of AI is so revolutionary that it will make ChatGPT as obsolete as VHS tapes. Believe it or not, this could end up being more valuable than Microsoft itself. [Click here to see the details]( because I found a way for you to profit from it. -- A Logical Buyer Apollo’s piqued interest in Intel has followed Qualcomm’s discussions to acquire Intel. Nothing gets private equity firms more excited than knowing that a financially healthy company is on the prowl to acquire one of its competitors. After all, someone thinks there’s a lot of money to be made… The potential deal is already being misunderstood. Most are assuming that Qualcomm wants to buy Intel outright. And based on that assumption, the deal would undergo antitrust reviews with the risk of being blocked by regulators. These presumptions are stupid. Qualcomm, while it’s currently worth $188 billion compared to Intel’s $120 billion, has $13 billion in cash and will generate about $11.4 billion in free cash flow this year. It’s a ridiculously healthy company, but it would have to raise massive debt and/or significantly dilute its shareholders in a cash/equity deal to acquire Intel in one bite. I already have indigestion thinking about it. A deal like that simply doesn’t make sense, and I’m sure that Apollo would agree. Qualcomm is a fabless semiconductor company, meaning it has no semiconductor manufacturing plants. That’s not about to change. Manufacturing is not Qualcomm’s business. And the company has long been making strides to expand its business beyond semiconductors designed for wireless devices. To that end, two of the most desirable industry segments to expand Qualcomm’s business have been the automotive and data center sectors. These are two fantastic, high-growth opportunities that Qualcomm has been making good progress on. But an acquisition would accelerate and even transform those goals… The Breakup The right deal is one in which Qualcomm acquires the businesses that it can leverage the most, rather than eating the whole company of Intel. The smart play would be a deal that helps Intel transition into its foundry business – its manufacturing business – so that it can become a legitimate, albeit smaller, competitor to TSMC. Qualcomm could carve out and acquire: - Intel’s client computing product group – these are CPUs for personal computing - Intel’s data center product group – these are CPUs and accelerators for data centers - Mobileye (MBLY) – software and semiconductors for advanced driver assistance systems (ADAS) and autonomous driving [note: Intel still owns 88% of Mobileye’s shares] - Intel’s programmable solutions group – which is basically Altera, an FPGA company that Intel acquired in 2015 for $16.7 billion. This business unit is primarily focused on wireline/wireless communications, data centers, and automotive Ideally, Qualcomm wouldn’t have to take on Intel’s memory solutions group. That’s not an interesting product segment for Qualcomm. But if it had to in order to get a deal done, it could take on the asset and then divest it as soon as possible to another player in the memory industry, like Micron Technology (MU). Part of the deal would most certainly be commitments from Qualcomm to continue to use Intel’s fab to produce a certain amount of Intel’s products for a number of years exclusively. This would assure Intel’s core revenues, and also its private equity backers like Apollo, to support the deal. A deal structured in this way would avoid any serious regulatory scrutiny. It provides a path forward for Intel, with the added potential benefit of having a U.S.-based semiconductor manufacturing giant as somewhat of a counterbalance to Taiwan’s TSMC. Such a deal would also provide healthy competition in the automotive and data center markets. Qualcomm would then have enough scale to be a strategic supplier in both segments and achieve its goal of diversification. There’s a deal to be done here. Apollo wouldn’t have inserted itself cleverly and invested billions if there wasn’t. And now that the wolf is amongst the flock, it has an insider's view on how Intel might be broken up. It will have the inside track on assets to be bought and sold for big profits. We can be sure that Apollo, with its access to Intel’s board and largest investors, will be pushing, nudging, nibbling, and if necessary “forcing” a breakup to move forward. And for many at Intel, that “bite” will sting. The outcome won’t be what they wanted for the future of Intel. And they’ll regret taking the money in the first place. Yet, assuming it happens, it’s going to be transformational for the semiconductor industry. Never forget, beware of a wolf in sheep’s clothing… [Brownstone Research]( Brownstone Research 1125 N Charles St, Baltimore, MD 21201 [www.brownstoneresearch.com]( To ensure our emails continue reaching your inbox, please [add our email address]( to your address book. This editorial email containing advertisements was sent to {EMAIL} because you subscribed to this service. To stop receiving these emails, click [here](. Brownstone Research welcomes your feedback and questions. 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